Goldman: Don't freak out about a global recession

Goldman Sachs Blink

Carnage in financial and commodity markets may be painting a doomsday picture for the world economy, but the threat of a global recession is low, says Goldman Sachs, which advocates remaining overweight developed market equities over the next six to 12 months.

"Despite the recent escalation of market concerns, our economics team cautions against taking too big a global growth signal away from the weakness in China and its impact on commodity market weakness," Goldman Sachs' strategists led by Peter Oppenheimer wrote in a note late Monday.

"We remain of the view that a global recession is very unlikely," the strategists said.

A sharp selloff has swept across equity and commodities market in recent days amid growing worries over a marked slowdown in the Chinese economy, the world's growth engine for long. U.S. stocks have crashed into bear market territory and oil prices have plummeted to multi-year lows.

Nevertheless, the bank highlights that growth in developed markets remains intact, and will remain relatively shielded to weakness in China and emerging markets.

In fact, growth in advanced economies should also get a boost from slumping energy prices, the bank said. U.S. light crude plunged 5.5 percent on Monday to $38.24 a barrel, the lowest since February 2009 amid concerns that a global economic slowdown would drastically hit oil consumption. While Brent crude slumped 6 percent to $42.80 a barrel after hitting a session low of $42.51, its weakest since March 11, 2009.

"Ultimately, the risks are mainly in China itself and it is the overstated fear of the risk to global growth coming from China, and lack of confidence in its potential policy support, that we believe will create investment opportunities and a likely overshoot in valuations," the Goldman strategists said.

So, how does this play out in Goldman's investment strategy?

The bank is sticking with the stance that it's had all year, telling investors to remain overweight developed market equities versus emerging market equities.

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"Many EMs with small open economies, and exporters selling commodities to China, are likely to remain under pressure. Several also have their own imbalances to address, and CNY devaluation (which we think has further to go in the medium term) makes this much harder and requires further moves in currencies," it said.

The bank lowered its 3, 6 and 12-month targets for the MSCI Asia-ex Japan index to 405, 430 and 455, implying 0 percent, 6 percent and 12 percent price returns.

"This is because: (a) 2016 earnings risk remains to the downside, and (b) equity risk premia will likely be higher unless the growth environment improves," the bank said.

Within Asia, it tweaked its stance on Korea - moving to market weight from overweight "given its high cyclical exposure" and raised Australia to market weight "given greater scope for policy easing and the fall in commodity exposure in the index."

As for developed markets, it is standing by its recommendation of being long Japan and Europe and underweight the U.S over a 12-month horizon.

"This has worked well and we continue to believe it is the right view over a 12-month horizon given the relative valuations and positions in their respective profits cycles," the bank said.

Its targets on Japan's Topix, STOXX Europe 600 and the S&P 500 represent gains of 26.9 percent, 24.3 percent and 12.6 percent respectively over the next 12 months.

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